QKA 2 Unit 5 ADP/ACP Testing Part 2 Flashcards
If the 401(k) arrangement fails the ADP test, there are four corrective methods permitted, which are:
1) distribution of excess contributions
2) contributing QNEC’s
3) shifting QMAC’s into the ADP test
4) recharacterization of excess contributions
A failed ADP test must be corrected within. What timeframe?
Within 12 months following the close of the plan year
When considering the four possible, ADP failed testing corrections, what is the order in which the corrections should occur?
1) the QNEC and shifting of QMAC are applied first
If Step 1 was not used or did not fully correct then proceed to Step 2-
2)re-characterizing excess contributions if possible
3) then distributing excess contributions
If a 401k arrangement has an allowance for after tax contributions, then what additional step can be done to correct for a failed ADP/ACP test? What 2 things happen as a result?
Excess contributions are re-characterized as after-tax employee contributions.
1) the employee is taxed for the amount re-characterized
2) re-characterized amounts are tested under the ACP test as if they were part of the 401M arrangement
How is the 401k arrangement treated if the ADP test is not corrected within the 12 month timeframe? What is this also called?
What happens going forward?
1) The 401(k) arrangement is treated as a non-qualified cash or deferred arrangement.
2) Also called CODA
3) Elective deferral’s made under the CODA are includable in gross income for the year in which they were deferred
For a plan that has failed the ADP test and proceeds forward underneath a CODA, what test is now applied rather than the ADP Test? What are the ramifications for a failure?
Going forward the CODA is tested under the general nondiscrimination requirements of IRC410(a)(4) rather than the ADP test.
Failure to pass the general test would disqualify the plan.
What does EPCRS stand for?
Employee plans compliance resolution system
What may a plan do to correct a failed ADP test after the 12 months has expired?
Employer can correct the failure through EPCRS
EPCRS programs usually involve more what?
Out-of-pocket costs for the employer
If the 401M arrangement fails the ACP test what are the 3 corrective methods permitted?
1) Shift Elective Deferrals into the ACP Test
2) distribution or forfeiture of excess aggregate contributions
3) contribution of QNEC or QMAC
Excess aggregate contributions consist of two types of contributions. What could they be?
Matching contributions or after tax employee contributions
Of the third possible correction for a failed ACP test; “shifting elective deferral into the ACP test”, the plan must satisfy the following: (2 items)
The plan must satisfy the ADP test twice to include the first time with all deferrals, and the second time after deferrals are shifted to satisfy the ACP test
How are vested excess aggregate contributions dealt with?
Vested excess aggregate contributions are never forfeited to the plan. They are distributed to the employee.
What are the only types of excess aggregate contributions that can be forfeited to the plan then?
Those that are unvested
Is choosing to not allocate the matching contributions otherwise owed to an HCE per the Plan Document in an effort to correct for possible ACP violations provided for? And if not why?
No, it is not provided for. The match should allocate according to according to the schedule. The HCE should be allocated the match due and then either the excess amount be distributed or forfeited according to the correct correction method.
Do some plans allow for the administrator to adjust an HCE’s after tax deferral percentage mid year
?
Yes
Unlike a failed ADP test, if the ACP test is not corrected within the 12 month period, then what happens?
The entire plan is disqualified because it is treated as having failed IRC 401(a)4
Are corrections allowed through ECPRS even though they failed ACP test is disqualified?
Yes
Even though there is a 12 month period to distribute excess contributions after a failed test what happens if the distribution does not occur within 2 1/2 months?
An excise taxes applied
For plans with an EACA, what is the grace period to avoid excise taxes after the end of the year for distributing?
Instead of 2 1/2 months, it is six months
What method is used to determine the amount of excess contributions that need to be returned?
The leveling method
What are the six steps of the ACP process?
Determine the following:
1) whether Current or prior method is used
2) which participants are includable
3) HCEs NHCE groups
4) each employees ACR
5) each groups ACP
6) compare the groups did it pass?
What is the formula to determine the ACR?
ACR= Match + after tax contributions / Compensation
What is the formula for determining the ACP for a given group?
ACP = Total ACR for Group / number of participants in group